Related Quotes

It said Mr Greig was an ordinary investor who incurred a capital loss; a big loss, yes, but one no different to the countless people who bet daily on the sharemarket and lose.

Justice Tom Thawley said he accepted the Nexus shares were acquired with a desire to sell them at a profit.

"Purchasers of listed shares often make the decision to acquire them with a view of profiting from dividends or an increase in the share price, or both," his judgment said.

"That hope ... does not necessarily make the purchase of the shares a business operation or commercial transaction."

Profits that can be classified as capital gains are therefore far more valuable from a tax perspective for certain investors.
James Davies

The distinction between an income receipt and capital receipt is critical for determining tax outcomes, but is not always straightforward.

Profit-making venture

Income is generally regarded as regular, recurrent or periodical. A good example is dividends from shares. On the other hand, a capital gain or loss is the difference between an asset's purchase price and the price for which it is sold, minus any costs.

Where things get tricky is when something appears to be a capital gain but might more correctly be treated as income derived by a taxpayer who entered into a profit-making venture, or is carrying on a business.

Foreign property investors, purchasers of property are obliged to withhold 12.5 per cent of the sale price and pay it directly to the ATO.
Louie Douvis

This is what Mr Greig unsuccessfully sought to prove in relation to his Nexus shares.

What makes this space especially important when it comes to investing is that while income (or gains on revenue account) is taxed at full marginal rates, capital gains are sometimes eligible for the 50 per cent capital gains tax discount.

Profits that can be classified as capital gains are therefore far more valuable from a tax perspective for certain investors, notably individuals or superannuation funds. The opposite is also true. Deductions for revenue losses are at full marginal rates.

If taxpayers could swing it, everything on the way up would be on capital account and everything on the way down would be on revenue account.

Vendors are now being sent friendly letters by the ATO, before a return has even been lodged.
Brendon Thorne

Of course, the Australian Tax Office is well aware of this.

"Interestingly, the ATO's usual approach to people who speculate on shares is to treat them as being on capital account, like the way they did for Mr Greig," William Buck director of tax services Ian Snook says.

Speculate on property

"But where people speculate on property, the ATO tends to treat them as entering into commercial or profit-making transactions, which is how Mr Greig argued he should be treated.

"The type of asset being acquired really seems to have an impact on the approach the ATO and the courts take, which probably shouldn't be the case, but is something investors need to be cognisant of."

Indeed, the question of whether profits on the sale of property should be on revenue or capital account is keeping quite a few investors up at night following a policy tweak in 2016.

As part of a crackdown on foreign property investors, purchasers of property are obliged to withhold 12.5 per cent of the sale price and pay it directly to the ATO. Resident vendors now need to seek a clearance certificate from the ATO in advance of the sale to ensure a purchaser does not withhold from the sale proceeds.

What it all means in practice is that the ATO has real-time information on property exchanges from a number of sources.

Gone are the days when the sale would proceed, nine months later a tax return would be lodged and the ATO may or may not then raise questions following a review of that return.

Vendors are now being sent friendly letters by the ATO, before a return has even been lodged for the period in question, reminding them they will need to think about how any gains are characterised for tax purposes.

"In Greig, the [tax] Commissioner is arguing the shares were not held on revenue account and were capital assets notwithstanding they were clearly bought with an intention of making a profit," Arnold Bloch Leibler tax team partner Clint Harding says.

"Whereas we are seeing an increasing number of aggressive audits and pre-audit processes being run by the Commissioner asserting the opposite – the real property in question is a revenue asset or was acquired as part of a profit-making scheme, and therefore the CGT discount does not apply. The fine line between the two outcomes is often not well understood in the market or by advisers."

Two court cases have emboldened the Commissioner and have investors spooked.

In August v Commissioner of Taxation [2013], the taxpayer acquired various shops in the same centre from 1997 to 1999, developed them and installed tenants on long-term leases. The shops were sold in 2006. Although the properties were held for as long as nine years, the full court of the Federal Court found August's primary intention in purchasing the properties was to resell them at a profit.

Onus of proof

As such the gain was ordinary income, or on revenue account. That is, the intent of the investment was to derive an income, not capitalise on growth in the value of the capital. August was ineligible to claim the 50 per cent CGT discount.

Harding says the onus of proof is on the taxpayer to establish the basis on which property is held. "It is crucial that the taxpayer's relevant intention is supported by evidence," he says.

"That means being able to produce documentation to the ATO that is consistent with your stated intent. It's not about what you think, it's about what you can prove."

In a second court case, Jure Domazet was the founder of a property building, development and investment group called Doma Group.

In the 2008 income year, the trustee of his family trust sold an office building for about $72 million that was acquired in 1999. The family trust treated the gain on sale of about $40 million as a capital gain and applied the 50 per cent discount.

However, the ATO argued, unsuccessfully, that it was a revenue gain. This was because although Doma Group was clearly in the business of developing and selling property, the taxpayer was able to convince the tribunal that the particular property in question had been earmarked for a particular purpose.

Crucially, bank documents indicated the building would be "retained on completion for investment".